Harley-Davidson, Inc (HOG)
Q3 2008 Earnings Call Transcript
October 16, 2008 9:00 a.m. ET

Executives

Amy Guiffre – Director of Investor Relations
James L. Ziemer – Chief Executive Officer, President
Thomas E. Bergmann – Chief Financial Officer
Saiyid T. Naqvi – President, Harley-Davidson Financial Services

Analysts

Edward Aaron – RBC Capital Markets
Craig Kennison – Robert W. Baird & Co
Robin Farley – UBS
Timothy Conder – Wachovia Capital Markets
Dara Mohsenian – J.P. Morgan
Anthony Powell – Barclays Capital
James Hardiman – FTN Midwest Securities Corp.
Patrick Archambault – Goldman Sachs
Bob Simonson – William Blair & Company

Presentation

Operator

Good morning and my name is Patrick and I’ll be your conference operator today. At this time I’ll like to welcome everyone to the Harley-Davidson’s third quarter 2008 earnings conference call. (Operator Instructions) All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. If you’d like to ask a question during this time, simply press * then the number 1 on your telephone keypad. If you’d like to withdraw your question press the pound key. Thank you. I would now like to turn the call over to Amy Guiffre. You may begin your conference.

Amy Guiffre – Director of Investor Relations

Thank you, Patrick and good morning everyone. Welcome to The Harley Davidson third quarter 2008 conference call. Today Harley-Davidson’s CEO Jim Ziemer will provide his thoughts on the current global economy and the outlook for our business. CFO Tom Bergmann will share the financial results for the third quarter and the President of Harley-Davidson Financial Services Saiyid Naqvi will talk about the performance of that business unit. At the close of our prepared comments we will open the call for questions. Before we begin please note that this call is being webcast live on www.harley-davidson.com and will be available for replay throughout the next several weeks before being archived. It will also be accessed until October 23 by calling 706-645-9291 or 800-642-1687 in the U.S. The pin number is 64882373#. Our comments today will include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include among others matters we have noted in our latest earnings release and filings with the SEC. Harley-Davidson disclaims any obligation to update information in this call.

Now I would like to introduce the CEO and President of Harley-Davidson, Inc., Jim Ziemer.

James L. Ziemer – Chief Executive Officer

Good morning. To state the obvious, there’s no doubt that these are difficult economic times in the U.S. and globally and every business is feeling some impact. Harley-Davidson continues to be fortunate to be operating in the current environment from a position of strength. I can assure you that everyone in the organization is working hard and smarts to produce results but we can’t control external forces at work in the economy and the credit market, earlier underlining causes. Harley-Davidson is extremely focused on appropriately managing the many aspects of the business that we do control. Let me start off by thanking our employees, our dealers and our suppliers for all their contributions.

As I look at our third quarter results and everything that’s gone on in the market since the end of September, I believe there are three key factors to keep in mind. First, although the economic turmoil in the U.S. to an increasing extent in the international markets makes this a very tough business environment, we believe we have positioned Harley-Davidson appropriately for current conditions. We are on track with our business plans for the year. Second, during these turbulent times in the credit market we’ve been able to maintain Harley-Davidson Financial Services position as a stable, consistent source for financing for dealers and consumers. That’s been no small feat. I believe it reflects the underlying strength of the HDFS business model as well as the broader capability of the Motor Company in Harley-Davidson, Inc, and third, while Harley-Davidson’s business in certain international markets is also under some pressure due to the global economic downturn, we believe that the international markets will continue to play a growing role in the overall picture for Harley-Davidson. Before I turn it over to Tom, let me also reiterate something that you hear me say often. Harley-Davidson has always managed the business for the long-term and we will continue to do so. As the company continues to navigate the current business environment, we believe a long-term focus is more important than ever before for the brand.

So with that as the background in context, I’ll hand it off to Tom for the financials and I’ll be back a bit later in the call.

Thomas E. Bergmann – Chief Financial Officer

Great, thanks Jim and good morning everyone. I want to take a moment to reiterate Jim’s comment that while the current economic environment is challenging, we continue to take the necessary steps to insure we are maintaining our strong financial position and protecting our premium brand for the long-term. As I rode back to Milwaukee from Bend, Oregon, to celebrate the 105th anniversary it occurred to me day after day, mile after mile just how powerful the Harley-Davidson brand really is. Riders from around the world joined our group as we rode towards Milwaukee. Experiencing the Harley-Davidson brotherhood as we pulled into Milwaukee to join thousands of other riders was powerful and emotional. There is no question in my mind that only Harley-Davidson can offer these once-in-a-lifetime experiences and solidify deep emotional connections to a brand. Now here are a few thoughts before jumping into the financial details. Worldwide retail sales and dealer inventory are in line with our expectations. The decision we made back in April to reduce shipments is playing out very well and has proven to be the right course of action. Second, and I’ll be more specific later, HDFS management continues to do a good job managing through a very difficult credit and market capital environment. Year-to-date, HDFS has generated over $100 million of operating income demonstrating that even in these market conditions it has a solid business model. Furthermore, we have put considerable time and energy into developing alternative funding plans for HDFS that give me a high degree of confidence that we’ll have adequate financial flexibility and liquidity to fund HDFS through 2009.

Third, we are taking a realistic view that the near term global economic environment will be challenging for our business and that the worldwide motorcycle market growth may slow somewhat in the near-term. We will continue to make the appropriate decisions to manage through the current environment will continuing to invest in those activities that will strengthen the brand and support our long-term growth potential. With that, let me now turn to the third quarter of 2008 results for the motorcycle and related products segment compared to the third quarter of 2007.

First let’s take a look at retail sales. Our 2009 model year product started shipping into all markets during the third quarter. Overall the response has been very positive. Our industry leading touring family features a completely redesigned chassis. Customers are impressed when they experience a new level of comfort and responsiveness. Tri Glide, our new three wheel motorcycle, has also been very strongly received. Many dealers have already taken deposits on their expected annual allotment and dealers tell us demand is high. We believe Tri Glide is meeting the strategic objectives to keep riders riding longer and bringing in new customers who are not comfortable with a traditional two wheel motorcycle. Feedback on the new V-Rod Muscle has also been very positive. Last week we launched a campaign that will give the new V-Rod Muscle a lot of exposure among the target audience and beyond. It features Sports Illustrated and Victoria’s Secret model Marisa Miller. So far the campaign is getting a lot of attention and plenty of hits to the behind the scenes video on YouTube. You should check it out.

Now looking at our dealers’ retail performance on a worldwide basis retail sales of Harley-Davidson motorcycles were down 9.6% for the quarter compared to a year ago. Retail sales of new Harley-Davidson motorcycles in the U.S. decreased 15.5% in the third quarter of 2008 compared to the same period in 2007. Overall the U.S. 651+cc motorcycle market decreased 3.1% in the third quarter. To understand our performance relative to the U.S. heavyweight motorcycle market in the third quarter, you need to keep two factors in mind. One, the ‘Stick It To The Man’ financing promotion that ran during June and July of last year, making year-over-year comparisons more difficult. And second, the Japanese manufacturers were still busy implementing lower financing offers and more extreme promotional activities than last year. These tactics appeared to drive unit sales in the U.S. industry this quarter, particularly of non-current model year products. The percentage of non-current model year motorcycles sold by Japanese manufacturers was up considerably compared to last year. For example, 50% of one manufacturer’s sales in the quarter were prior model year motorcycles.